L1 Long Short Fund Limited (expected ASX code: LSF) Pre-IPO Report

Transcription

1 L1 Long Short Fund Limited (expected ASX code: LSF) Pre-IPO Report February 2018

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3 Contents 1. Product Summary Investor Suitability Recommendation SWOT Structure Management & Corporate Governance Investment Process Portfolio Performance Analytics Peer Comparison Appendix A Ratings Process Appendix B Managed Investments Coverage... 13

4 L1 Long Short Fund Limited (expected ASX code: LSF) Note: This report is based on information provided by L1 Capital Pty Limited. Rating Not Recommended Key Investment Information Expected ASX Code LSF Offer Price ($) 2.00 Expected Offer Close 6 April 2018 Expected Listing Date 24 April 2018 Min/Max Shares on Offer (m), not including oversubscriptions Proforma NAV ($) per Share (Min/Max Subscription) Fees: Management Fee (p.a) ex GST* 50/ % Performance Fee* 20% Performance Hurdle High water mark *The Manager is eligible for a performance fee of 20% of the outperformacne of the high water mark, which is the previous high NTA. Key Exposure Underlying Exposure: Investment Grade FX Exposure: Recommended Recommended+ Highly Recommended Long and short portfolio predominantly of Australian and NZ securities with the potential for some exposure to global securities. The company is expected to primarily invest in domestically listed securities and as such will have no direct foreign currency exposure, however the company can invest up to 30% of the portfolio in global securities. Any exposure to global securities will have direct foreign currency exposure. Typically the Manager will hedge the portfolio to Australian dollars, however, the Manager may leave the global positions unhedged if they believe it may be of benefit to the portfolio. The investment opinion in this report is current as at the date of publication. Investors and advisers should be aware that over time the circumstances of the issuer and/or product may change which may affect our investment opinion. 1. PRODUCT SUMMARY L1 Long Short Fund Limited (expected ASX code: LSF) is a newly established investment company seeking to list on the ASX. The company is seeking to raise between $100m and $500m through the issue of 50m to 250m shares at $2.00 per share. The company has the ability to raise a further $100m in oversubscriptions. The company will provide exposure to an actively managed long/short portfolio of predominantly Australian and NZ securities with the ability to invest up to 30% of the portfolio in global securities. The company will have an absolute return focus and will seek to provide attractive risk-adjusted returns with a focus on capital preservation. The portfolio can have a maximum net exposure of 150% and a maximum gross exposure of 300%. L1 Capital Pty Limited has been appointed as the Manager of the portfolio. The Manager was established in 2007 and currently has ~$3b FUM. The Manager will receive an annual management fee of 1.4% (plus GST) of the value of the portfolio, calculated monthly and paid monthly in arrears. The Manager will pay a large majority of the operating costs of the company from the management fee. The Manager will also be eligible for a performance fee of 20% (plus GST) of the outperformance of the high watermark, which is the previous high NTA. The owners of the Manager will reinvest all after-tax proceeds from performance fees in the company. If shares are trading at a premium to NTA the company will issue new shares to the owners, however, if shares are trading at a discount the owners will purchase shares on market. 2. INVESTOR SUITABILITY An investment in the company is suitable for those investors seeking exposure to an actively managed, absolute return style fund. The company intends to pay dividends, franked to the maximum extent possible, however, creating a steady dividend stream is not a focus of the Manager. Therefore, an investment in the company is not suitable for those investors seeking a regular income stream. The Manager has a long-term investment return objective, therefore, an investment in the company is suited to investors that have a long-term investment horizon. The company will take short positions in stocks and use derivatives. Shorting stocks and the use of derivatives involves additional risks to that of investing long. Investors should be aware of and comfortable with the risks associated with shorting stocks and derivatives before investing in the company. In addition to the leverage created from shorting, the Manager can use debt to increase the scale of the portfolio. The use of debt in the portfolio can magnify both the gains and losses in investments. With a gross exposure limit of 300%, there is the potential for significant leverage. We view this product as suitable for those investors that have a higher level of risk tolerance. 3. RECOMMENDATION (IIR) has assigned L1 Long Short Fund Limited (expected ASX code: LSF) a Recommended Plus rating. The company is newly established and as such has no performance history, however, the Manager is responsible for the management of the L1 Capital Long Short Fund which uses the same investment process and strategy that will be used for the LSF portfolio. The L1 Capital Long Short Fund was established in September 2014 and has outperformed its total return objective of at least 10% p.a, net of fees and expenses, generating net returns of 36.9%p.a to 31 December The Fund has also achieved its capital preservation objective with the Fund having a lower volatility than the market and a downside capture ratio of -88.1, which means the Fund has generated positive returns during negative market periods. While we do not expect these lofty returns to be able to be sustained over the long-term, the performance of the L1 Capital Long Short Fund suggests the company has the ability to effectively manage a long short portfolio to achieve its objectives. There are some positive features associated with the structure of the company including: (1) the Manager will be paying a majority of the operating costs of the company from the management fee; (2) strong alignment of interest with the owners of the Manager committing to investing $10m in the company and reinvesting any performance fees received (after-tax) into the company. Shares acquired by the owners of the Manager will be held in voluntary escrow for the earlier of 10 years or the duration of the IMA; and (3) the Manager has agreed to forego management fees until the costs associated with the IPO are recovered by the company resulting in the NTA being the same as the offer price at the date of listing. A drawback of the structure is the performance hurdle for the performance fee. We do not view the performance hurdle of the previous high NTA as appropriate. 1

5 4. SWOT Strengths The Manager has agreed to forego management fees until such time as the costs for the capital raising and listing have been recouped in full. The costs appear as a receivable on the balance sheet so the NTA at the date of listing will be the same as the offer price. Irrespective of the amount of capital raised, the costs are expected to be recouped within three years. The Manager invests a large proportion of their wealth into funds managed by L1 Capital aligning the interest of the Manager with shareholders. The co-founders and joint CIO s have committed to investing $5m each under the offer and the owners of the Manager will also be investing any performance fees earned (after tax) into shares of the company. All shares issued to the owners of the Manager will be held in voluntary escrow for the earlier of 10 years or the duration of the IMA. The L1 Capital Long Short Fund that the investment strategy and investment process for LSF will be replicating has generated exemplary returns since inception and has met the target return of at least 10%p.a, net of fees and expenses. The Manager has achieved its objective of capital preservation through the L1 Capital Long Short Fund by limiting drawdowns and generating positive returns in down markets. The Board of LSF has a majority of independent directors, in line with ASX best practices. The Manager has a stable investment team with no departures since its establishment in Weaknesses We do not view the performance hurdle of the high water mark as a suitable hurdle for the performance fee. While it is a positive that the Manager is only eligible or performance fees when generating a positive return, we do not view it as appropriate to reward the Manager in addition to the management fee for simply generating capital growth for shareholders. Opportunities LSF provides retail investors the opportunity to gain access to the investment team of L1 Capital Pty Ltd, who have extensive experience in the funds management industry. The company provides access to the investment strategy that has generated strong returns in the L1 Capital Long Short Fund, which has a minimum investment amount of $500,000. Threats The Manager has the ability to significantly leverage the portfolio to improve returns from underlying investments, however, with leverage comes additional levels of risk given that while it can magnify gains, it can also magnify losses in the event the underlying investments don t perform as expected. An increasing interest rate environment will likely increase the costs of leverage used in the portfolio, which may impact returns. In the event the Manager is terminated before the capital raising and listing costs are recovered, the company will not recover the outstanding funds. Given the funds are expected to be recovered within three years from listing we view this risk as very low. The Manager can invest up to 30% of the portfolio in global securities and as such will have direct exposure to foreign currency movements. The Manager will typically hedge the currency exposure, however, may elect to keep the exposure unhedged in the event the Manager believes it will be beneficial to the portfolio. In the event the currency position goes in the opposite direction to that expected, this may detract from the portfolio value. As with all LICs, the company may trade below the portfolio value. In the event the company trades at a discount to NTA for an extended period of time, shareholders may not be able to redeem their investment at portfolio value. 2

6 5. STRUCTURE PRODUCT OVERVIEW L1 Long Short Fund Limited (expected ASX code: LSF) is a newly established listed investment company seeking to commence trading on the ASX on 24 April The company is seeking to raise between $100m and $500m through the issue of 50m to 250m shares at $2.00 per share. The company has the ability to raise an additional $100m in oversubscriptions. The Manager will be paying for the capital raising and listing costs via a loan from the company, meaning the NTA will be the same as the issue price at the date of listing as the costs will be recognised as a receivable on the balance sheet. The Manager has agreed to forego management fees until the funds have been fully recovered by the company. The time to recover the funds will vary depending on the amount of capital raised, however, will take no more than three years to be recouped. L1 Capital Pty Ltd has been appointed as the Manager of the portfolio. L1 Capital was established in 2007 and currently has ~$3b FUM across its four funds. The company will provide exposure to an actively managed, long/short portfolio predominantly of Australian and NZ securities, with the ability to invest up to 30% of the portfolio in global securities. The portfolio will typically have securities, although there is no requirements to maintain this number of stocks in the portfolio. In the event the Manager can not identify attractive opportunities it can hold 100% cash. The Manager has an absolute return focus, seeking to generate superior risk-adjusted returns with a focus on capital preservation. The portfolio has a maximum gross exposure limitation of 300% and a maximum net exposure of 150%. The leveraged exposure can be generated via shorting stocks, use of derivatives or using debt to increase the exposure to an investment. The average gross exposure of the current L1 Capital Long Short Fund has been 233% with an average net exposure of 59%. The Manager has a focus on capital growth and while creating a high dividend yield is not an objective of the company, the company will be seek to pay dividends, franked to the maximum extent possible, at the discretion of the Board. The Board will pay dividends if it is deemed to be within prudent business practices based on the cashflow and profit reserve position of the company. Given the Manager may invest in global securities, the portfolio may be exposed to foreign currency movements. The Manager will typically hedge the currency exposure, however, can leave the exposure unhedged if they feel the exposure will be beneficial to the portfolio. The Manager will be paid a management fee of 1.4% p.a (plus GST), accrued monthly and paid in arrears. The Manager will be paying the majority of the company s operating and administrative costs through the management fee. The Manager will also be eligible for a performance fee of 20% of the outperformance of the high water mark (previous high NTA). The owners of the Manager will invest any performance fees received (after tax) into LSF shares. If the company is trading at a premium to NTA the company will issue new shares to the owners. If the company is trading at a discount the owners of the Manager will purchase shares on market. All shares acquired from the reinvestment of performance fees will be subject to voluntary escrow for the earlier of a period of 10 years or the duration of the IMA. INVESTMENT STRUCTURE Investors L1 Long Short Fund Limited (LSF) Management Agreement (L1 Capital Pty Limited) Cash & Other Long/short portfolio of securities 3

7 Product Leverage Used: Capital Protection Tax Disclaimer: Capital gains: Dividends: Legal Structure Wrapper: Investment Manager: Investor Leverage Available: Risks Short Selling Risk: Gearing Risk: Manager Risk: Third Party Risk: Foreign Currency Risk: The Manager can use leverage in the form of debt to increase exposure to underlying securities. The Manager will also short stocks and use derivative, which creates leverage given gains and losses can be magnified. The portfolio has a gross exposure limit of 300% of the portfolio NAV. na Tax consequences depend on individual circumstances. Investors must seek their own taxation advice. The following comments show s expectation of tax for ordinary Australian taxpayers, but cannot be considered tax advice. A capital gains tax (CGT) event will likely occur in the event the investor sells the shares on market for a higher price than it was purchased for. Investors will likely be eligible for the CGT discount if the shares are held for more than 12 months. Dividends will likely be on income account in the year earned. Listed Investment Company L1 Capital Pty Limited No The below is not a full list of all risks associated with the company but highlights what IIR considers to be the more significant risks associated with the company. A detailed risk assessment can be obtained from the Prospectus. The company will participate in short selling. Shorting stocks exposes the portfolio to additional risks to taking long positions with short positions potentially having an unlimited loss. Short selling can magnify the gains and losses experienced by a position. The Manager has the ability to use debt to increase the exposure to underlying investments. Using gearing may magnify the gains and losses of an investment. The performance of the portfolio is largely dependent on the stock picking and risk management skills of the Manager. There are some investment limitations to ensure a level of risk management with the portfolio, however, successive incorrect valuations and decisions regarding underlying investments may result in the company not achieving its objectives. The use of derivatives and short selling involves third parties and carries the risk of default from these parties or failure to meet their obligations which could result in a loss to the company. The Manager can invest up to 30% in global securities. The Manager will typically hedge the currency exposure, however, may leave the exposure unhedged if the Manager believes the currency exposure may add value to the portfolio. 4

8 6. MANAGEMENT & CORPORATE GOVERNANCE BOARD OF DIRECTORS The Board will comprise five members, the majority of which are independent, in line with ASX best practice guidelines. All the directors have extensive experience in their respective industries with the Chairman having experience as a Director on the Diversified United Investment Limited (ASX: DUI) LIC. Board of Directors Name Position Experience Andrew Larke John Macfarlane Harry Kingsley Independent Chairman Independent Director Independent Director Mr. Larke has over 20 years experience in M&A, capital markets and senior executive leadership positions. Mr. Larke was formerly Global Head of Strategy, Planning and M&A at Orica Limited and held senior corporate strategy, business and legal roles at North Ltd. Mr. Larke is currently a Non-Executive Director of Dulux Group Ltd, Diversified United Investment Limited and IXOM. Mr. Larke is also Chairman of Sand Hill Road hospitality. Mr. Macfarlane has had a long career as an international banker, serving as CEO of Bankers Trust New Zealand, Chief Country Officer and President of Deutsche Securities Japan, Executive Chairman of Deutsche Bank Australia and NZ, and Chairman and CEO of Deutsche Bank Australia. Mr. Macfarlane is currently on the boards of ANZ Banking Group Limited, Balmoral Pastoral Investments Pty Ltd, Colmac Group Pty Ltd, Craigs Investment Partners Limited, the Aikenhead Centre for Medical Discovery and St. Vincent s Institute of Medical Research. Mr. Kingsley is a senior corporate and commercial lawyer and is a partner at Holding Redlich. Mr. Kingsley was formerly the Senior Legal Counsel at Asciano Limited and Chief Legal Counsel at Pacific National, an Executive Director at Austock Group and a senior associate at Minter Ellison. Raphael Lamm Executive Director Mr. Lamm is a co-founder of the Manager and is joint Managing Director and joint CIO. Since establishing the Manager, Mr. Lamm has headed up the L1 Australian Equities Fund and the L1 Capital Long Short Fund. Prior to establishing the Manager, Mr. Lamm spent more than five years at Cooper Investors, where he was a portfolio Manager of the flagship Cooper Investors Australian Equities Fund. Mark Landau Executive Director Mr. Landau is a co-founder of the Manager and is joint Managing Director and joint CIO. Since establishing the Manager, Mr. Landau has headed up the L1 Australian Equities Fund and the L1 Capital Long Short Fund. Prior to establishing the Manager, Mr. Landau spent five years as an Investment Analyst at Invesco across both large cap and small cap funds. Mr. Landau also worked as a Senior Strategy Consultant at Accenture, providing financial analysis and corporate strategy advice to a range of Australian companies across a range of sectors. INVESTMENT MANAGER - L1 CAPITAL PTY LIMITED L1 Capital Pty Limited (the Manager) has been appointed as the Manager of the LSF portfolio. The Manager was established in 2007 and has ~$3b FUM prior to the listing of LSF. The Manager is responsible for four funds: (1) L1 Capital Australia Equities Fund; (2) L1 Capital Long Short Fund; (3) L1 Capital Global Opportunities Fund and (4) L1 Capital UK Residential Property Fund. The L1 Capital Long Short Fund employs the same investment process and investment strategy that will be used for the LSF portfolio. The Manager is 100% owned by senior members of the team. The Manager seeks to align its interests with investors through investing a large portion of their net worth in the funds managed by the Manager. Raphael Lamm and Mark Landau have each agreed to invest $5m each into LSF under the offer and will reinvest any performance fees (after tax) received. The investment team has been very stable with no departures from the investment team since its establishment in The investment team is small given the potential investment universe, however, the joint Managing Directors and Chief Investment Officers, reduce key man risk to an extent. Raphael Lamm and Mark Landau co-founded the Manager and they have jointly been responsible for the long only Australian equities fund and the long short fund. Both of them have extensive experience in funds management and will be ultimately responsible for the investment decisions of the LSF portfolio. The Investment Management Agreement (IMA) will be for an initial five years with an automatic five year extension unless terminated beforehand. The Manager has applied to the ASX for a waiver to extend the initial period from five to ten years. 5

9 Investment Team Name Position Years Experience Years as part of the investment team Raphael Lamm Joint Managing Director & CIO years (co-founder) Mark Landau Joint Managing Director & CIO years (co-founder) Lev Margolin Portfolio Manager 14 9 years Martin Tavella Investment Analyst years Wayne Murray Investment Specialist 13 1 year Lubos Polakovic Dealer 18 1 year 7. INVESTMENT PROCESS INVESTMENT OBJECTIVE The investment objectives of the company are to deliver superior risk-adjusted returns over the long-term, which the Manager considers a period of five years, and to preserve capital. INVESTMENT PHILOSOPHY The Manager s investment strategy is based on three core premises: Valuation and qualitative factors are the ultimate determinant of long-term share price performance and both factors are of equal importance. The market continually presents opportunities to investors who can remain unemotional and have a long-term view. By remaining disciplined and adhering to their investment process, the Manager seeks to avoid the behavioural biases that they believe are common among investors. Meeting with a variety of stakeholders can provide a more complete view of a company s potential. Successful bottom-up investing requires detailed research and an independent thought process. INVESTMENT PROCESS The Manager has a bottom up fundamental approach to determine attractive investment opportunities. The investment process can be broken down into four steps:1) Idea Generation; 2) Valuation and Qualitative Assessment; 3) Ranking; and 4) Portfolio Construction. 1) Idea Generation: In addition to high level screening the Manager will embark on a comprehensive visitation schedule of a diverse range of stakeholders. The Manager believes in identifying opportunities primarily from direct contact with companies and other stakeholders, detailed company analysis and observing broader industry trends. The Manager will focus on companies within the S&P/ASX 200 Index, however, will invest abroad when either long or short opportunities are identified. 2) Valuation and Qualitative Assessment: The Manager believes that value and qualitative factors are both equally important factors to determining the long-term potential of a company. From a valuation perspective the Manager will use a number of valuation techniques to determine the value for a company and then compare this historical and peer figures. The valuation will seek to determine the level of upside and downside risks associated with the company. With respect to the qualitative assessment, the Manager looks at three factors, which are equally weighted in the assessment: Management quality; Industry structure; and Industry and market trends. 3) Ranking: The Manager ranks potential investments using its proprietary ranking system. The ranking system was developed in 2007 and the Manager attributes a large amount of its success to the system. 6

10 4) Portfolio Construction: The portfolio will consist of securities based on the ranking system with the weightings determined by a combination of risk and return with the largest weightings being the Manager s highest conviction ideas. This applies for both long and short positions. For short positions, the Manager is looking for companies that are overvalued, have poor quality factors and are over leveraged. The portfolio will be actively managed and therefore we expect a high level of turnover. The portfolio is required to invest within the below guidelines, which are designed to ensure a level of risk management. The investment guidelines restrict a maximum investment in a single security (both long and short) of 10% of NAV at the time of investment with a maximum long holding of 15% and a maximum short holding of 10% of the portfolio at any given time. The typical investment size of a long position is 1%-6% and 1%-4% for short positions. Anything over these sizes is reserved for securities that exhibit exceptional risk/ reward characteristics to the Manager. The Manager typically takes profits as the securities move in their favour and while the typical investment weightings are less than the limit, the L1 Capital Long Short Fund has had securities with a weighting above 10% throughout its history. There are no sector exposure limitations on the portfolio. The L1 Capital Long Short Fund has typically had good diversification across sectors. Investment Guidelines Maximum Long Position in Single Security 10% of portfolio NAV at time of purchase and a maximum weighting of 15% of the portfolio value. Maximum Short Position in Single Security 10% of portfolio NAV at time of purchase and a maximum weighting of 10% of the portfolio value. Geographic Exposure Net Exposure* Gross Exposure* Up to 30% of the portfolio s gross exposure can be invested in global securities. Maximum 150% of portfolio NAV. Maximum 300% of portfolio NAV. Derivative Exposure Maximum gross exposure of 150% of portfolio NAV with a maximum of 25% of portfolio value allocated to non-index derivatives. Unlisted Securities The Manager can invest up to 10% of the portfolio in pre-ipo companies. * In the event the maximum net and gross exposure levels are above the guideline amounts as a result of an increase in the value of the underlying securities it will not be considered as a breach of the investment mandate. 8. PORTFOLIO The company is newly established and as such has no performance history and no portfolio history. However, the investment strategy and process replicates that of the L1 Capital Long Short Fund that was established in September We have provided the portfolio characteristics of the L1 Capital Long Short Fund below, to provide investors with an insight into the likely characteristics of the portfolio for LSF. L1 Capital Long Short Fund Top 5 Long Positions (31 December 2017) Company Code Portfolio Weighting Boral Ltd ASX: BLD 5.7% Chorus Limited ASX: CNU 5.6% News Corporation Inc ASX: NWS 4.8% Macquarie Atlas Roads Group ASX: MQA 4.3% Commonwealth Bank of Australia ASX: CBA 4.3% 24.7% The portfolio will be predominantly invested in Australian and NZ securities, however up to 30% of the portfolio can be invested in global securities. As at 31 December 2017, the L1 Capital Long Short Fund had 76% of the portfolio allocated to domestic securities. This is slightly below the average (based on half yearly allocations since inception) of 79%. 7

11 Geographic Exposure Region As at 31 December 2017 Average Since Inception Australia/NZ 76.0% 79.0% North America 16.1% 12.9% Europe 3.2% 4.1% Asia 4.7% 4.0% As mentioned above, there are no limitations on sector exposures, however the Manager has maintained diversified sector exposure for the L1 Capital Long Short Fund. The active style of management is highlighted by the divergence between historical net sector exposures and those at 31 December The Materials sector has had both the largest long and short exposures based on the month-end average allocations since inception in September 2014 to 31 December 2017, with an average long exposure of 32.2% and an average short exposure of 11.3%. Historical Sector Net Exposure Sector As at 31 December 2017 Average Since Inception Consumer Discretionary 3.0% 13.8% Consumer Staples 2.0% 2.7% Energy 12.0% -0.1% Financials 12.0% 18.8% Health Care -2.0% 1.4% Industrials 17.0% 24.5% Information Technology 2.0% 2.3% Materials 29.0% 20.9% Telecommunications 7.0% 5.6% Utilities -1.0% 4.4% 81.0% 94.4% As with LSF, the L1 Capital Long Short Fund has a maximum gross exposure of 300% and maximum net exposure of 150%. The gross exposure of the L1 Capital Long Short Fund has ranged from 156.1%-291.2% since inception to 31 December 2017 and the net exposure has ranged from 18.5%-109.5% with an average of 58.7%. With the average gross exposure of the L1 Capital Long Short Fund being 233% investors can expect the LSF portfolio to have significant short exposure and the portfolio will employ a significant amount of leverage through shorting securities and the use of derivatives. Historically, the Fund has employed only small amounts of debt. Additionally long exposure will be increased as the Manager uses gains from short positions to invest in long positions. Historical L1 Capital Long Short Fund Portfolio Exposure 250% 200% 150% 100% 50% 0% -50% -100% -150% Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Long Short Net Exposure Mar-17 May-17 Jul-17 Sep-17 Nov-17 8

12 9. PERFORMANCE ANALYTICS SUMMARY OF ANALYTICAL RESULTS LSF is yet to list and therefore has no performance history. However, the portfolio will be managed using the investment process and strategy used in the L1 Capital Long Short Fund, which was established in September Given this, we have looked at the historical performance of the Long Short Fund to determine the historical performance of the investment strategy and the stock picking abilities of the Manager. We note that the L1 Capital Long Short Fund only has an operating history of three years. The Manager has been managing the L1 Capital Australian Equities Fund which has been operating since The Australian Equities Fund is a highly concentrated long only fund investing in Australian stocks that the Manager considers to be undervalued and have a positive outlook. The fund has a large cap bias with 70%-90% of the portfolio allocated to large cap stocks. The fund s objective is to outperform the S&P/ASX 200 Accumulation Index by at least 3% p.a (net of fees and expenses) over the long-term. The Manager has achieved this objective, generating total net returns of 9.3% p.a compared to the market of 4.5% p.a. The key findings include: The L1 Capital Long Short Fund has generated significant returns since inception in September 2014, returning 36.9%p.a to 31 December This is well above the Manager s objective of returning at least 10% p.a, net of fees and expenses. We have compared the performance of the Fund to the ASX 200 Accumulation Index given the portfolio is predominantly invested in Australian securities. The Manager has achieved its objective of achieving superior risk-adjusted returns with the Fund generating significantly greater returns than the market with a lower volatility, resulting in a Sharpe Ratio of 4.07, compared to the market Sharpe Ratio of The Manager has a focus on capital preservation. The Manager has achieved its objective of preserving capital with the Fund generating a negative downside market capture ratio of -88.1, which means the Fund has generated positive returns in the periods of negative market returns. In addition to this, the Fund has captured most of the upside in the market during periods of positive market returns with an upside market capture ratio of We note that the L1 Capital Long Short Fund has a different management fee structure and does not have the operating costs associated with the LIC, so the returns under the LIC structure may not have been the same as the unlisted trust. PERFORMANCE HISTORY The L1 Capital Long Short Fund is a benchmark agnostic fund that seeks to generate absolute returns with a total return of at least 10% p.a net of fees and expenses. The return objective is not a stipulated objective for LSF, however, is an internal benchmark for the Manager. The Fund has achieved its return objectives since inception in September 2014 to 31 December 2017, generating returns of 36.9%p.a. These returns have been generated on a consistent basis with an average rolling annual return of 41.2%. As shown in the below chart, the Fund has substantially outperformed the ASX 200 Accumulation Index since inception. We have compared the performance of the Fund to Australian market given the portfolio is predominantly invested in Australian securities, with an average of 79% of the portfolio allocated to domestic securities. The Fund has outperformed the market in 25 of the 40 months to 31 December 2017, with the periods of outperformance providing significantly greater returns than the periods of underperformance as shown in the below chart. 9

13 Historical Performance of L1 Capital Long Short Fund (1 September December 2017) % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Excess Return (RHS) ASX 200 Accumulation Index (LHS) L1 Capital Long Short Fund (LHS) As highlighted in the table below, the L1 Capital Long Short Fund has generated superior risk-adjusted returns since inception in September 2014 to 31 December 2017 with a Sharpe Ratio of While the Fund has performed well in its first three years of operation, we do not expect the Manager to be able to maintain this level of returns over the long-term. A key focus for the Manager is to preserve capital. The Manager has achieved this to date with a maximum monthly drawdown of 2.4% compared to the ASX 200 Accumulation Index of 7.8% and a downside capture ratio of -88.1, which means the Fund generated positive returns during periods of negative market returns. We note that there is significant levels of leverage in the portfolio with an average gross exposure of 233% and an average short exposure of 87%. L1 Capital Long Short Fund Performance to 31 December 2017 Return: L1 Capital Long Short Fund ASX 200 Acc. Index 1 year 30.4% 11.8% 3 year (p.a) 39.4% 8.6% Since Inception* 36.9% 6.9% Average Annual Rolling 41.2% 6.5% Risk: Standard Deviation 8.4% 11.9% Sharpe Ratio** Maximum Monthly Drawdown -2.4% -7.8% Upside Market Capture Ratio 97.6 na Downside Market Capture Ratio na *Inception date of 1 September **Based on the Australian 10 year government bond rate at 31 December 2017 of 2.58%. 10. PEER COMPARISON We have compared the key features of LSF with Australian focused absolute return LICs on the ASX. There are limited long/short strategies available to investors with an Australian security focus. We note that while all the below LICs can invest both long and short, some of the companies have a long bias and have periods where the portfolio will have no short exposure. The annual management fees charged by L1 Capital for managing the LSF portfolio is above the average management fee of 1.25% amongst the peer group. We note that the Manager will be paying a large majority of the operating costs of the company from its management fee and the Manager will be foregoing the management fee until the IPO costs are recovered by the company. 10

14 The performance fee for LSF is in line with the peer group with all companies paying a performance fee of 20%, however, we do not view the performance hurdle of the previous high NTA as appropriate. With the exception of MA1, all the other LICs have a performance hurdle that requires them to outperform a minimum benchmark. If the company raises the maximum subscription amount the company will be the largest company by market cap of the peer group. Peer Comparison LIC Name Australian Leaders Fund Limited Cadence Capital Limited Contrarian Value Fund Monash Absolute Investment Company Limited Naos Absolute Opportunities Company Limited Watermark Market Neutral Fund Limited L1 Long Short Fund Limited ASX Code *As at 16 February Listing Date Market Cap ($m)* Management Fee (%p.a, ex GST) Performance Fee (%) ALF February CDM December CVF January Performance Fee Hurdle All Ordinaries Accumulation Index All Ordinaries Accumulation Index S&P/ASX 200 Acc. Index MA1 April Previous high NTA NAC November RBA Cash Rate + 2.5% WMK July RBA Cash Rate LSF na na Previous High NTA 11

15 APPENDIX A RATINGS PROCESS INDEPENDENT INVESTMENT RESEARCH PTY LTD IIR RATING SYSTEM. IIR has developed a framework for rating investment product offerings in Australia. Our review process gives consideration to a broad number of qualitative and quantitative factors. Essentially, the evaluation process includes the following key factors: product management and underlying portfolio construction; investment management, product structure, risk management, experience and performance; fees, risks and likely outcomes. LMI Ratings Highly Recommended SCORE 83 and above Not Recommended Investment Grade Recommended Recommended+ Highly Recommended This is the highest rating provided by IIR, indicating this is a best of breed product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved exceptionally high scores in a number of categories. The product provides a highly attractive risk/return trade-off. The Fund is likely effectively to apply industry best practice to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors. Recommended Not Recommended Investment Grade Recommended Recommended+ Highly Recommended This rating indicates that IIR believes this is a superior grade product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved high scores in a number of categories. In addition, the product rates highly on one or two attributes in our key criteria. It has an above-average risk/return trade-off and should be able consistently to generate above average risk-adjusted returns in line with stated investment objectives. The Fund should be in a position effectively to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors. This should result in returns that reflect the expected level of risk. Recommended Not Recommended Investment Grade Recommended Recommended+ Highly Recommended This rating indicates that IIR believes this is an above-average grade product that has exceeded the minimum requirements of our review process across a number of key evaluation parameters. It has an above-average risk/return trade-off and should be able to consistently generate above-average risk adjusted returns in line with stated investment objectives. Investment Grade Not Recommended Investment Grade Recommended Recommended+ Highly Recommended This rating indicates that IIR believes this is an average grade product that has exceeded the minimum requirements of our review process across a number of key evaluation parameters. It has an average risk/ return trade-off and should be able to consistently generate average risk adjusted returns in line with stated investment objectives. Not Recommended <60 Not Recommended Investment Grade Recommended Recommended+ Highly Recommended This rating indicates that IIR believes that despite the product s merits and attributes, it has failed to meet the minimum aggregate requirements of our review process across a number of key evaluation parameters. While this is a product below the minimum rating to be considered Investment Grade, this does not mean the product is without merit. Funds in this category are considered to be susceptible to high risks that are not reflected by the projected return. Performance volatility, particularly on the down-side, is likely. 12